Gaps & Volatility, Part 3
Post a CommentIn the prior post, I showed the results of fading gaps in the E-mini S&P 500 during various periods of volatility, 1/1/1998 - 10/1/2008, using only a fixed 6 pt stop. Today I'll show the results of using a variable stop based upon the 5 day average true range (ATR). For comparison purposes, the following table shows the results of fading opening gaps using a stop equal to 30% of the 5 day ATR:
Observations: As volatility becomes extreme the variable ATR helps capture a greater percentage of the winning gap fades. However, this is more than offset by the lower win rates and profitability during less volatile periods where the percent of ATR appears to shrink the stop size too much.
The one big outlier is the 30-40 pt 5 day ATR range. Oddly, and somewhat surprisingly, the fixed 6 pt stop shows much better historical results than the volatility adjusted stop. I really can't explain - any thoughts?
Bottom line: volatility adjusted stops may be helpful during certain conditions, but not overly so - at least not at first glance without digging further into the numbers and/or not based upon the past 10 years of E-mini S&P futures data while using a 30% of ATR factor. Perhaps a different percentage would yield better results.
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